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spk05: Good day, ladies and gentlemen, and welcome to the RTX third quarter 2023 earnings conference call. My name is Lateef, and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes. On the call today are Greg Hayes, Chairman and Chief Executive Officer, Chris Calio, President and Chief Operating Officer, Neal Mitchell, Chief Financial Officer and Jennifer Reed, Vice President of Investor Relations. This call is being webcast live on the internet and there is a presentation available for download from RTX website at www.rtx.com. Please note, except where otherwise noted, the company will speak to results from continuing operations, excluding acquisition accounting adjustments and net non-recurring and or significant items. often referred to by management as other significant items. The company also reminds listeners that the earnings and cash flow expectations in any other forward-looking statements provided in this call are subject to risk and uncertainties. RTX SEC filings, including its forms, 8K, 10Q, and 10K, Provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. Once the call becomes open for questions, we ask that you limit your first round to one question per caller to give everyone the opportunity to participate. To ask a question, you will need to press star 11 on your telephone. You may ask further questions by reinserting yourself into the queue as time permits. With that, I will now turn the call over to Mr. Hayes.
spk10: All right, thank you, and good morning, everyone. Before we start, I want to spend just a minute acknowledging the tragic situation playing out in Israel today. It has been devastating to see what has unfolded there over the last couple of weeks, and our thoughts and prayers are with the people impacted, including the thousands of RTX employees that call Israel home. With that said, let me turn to an update on our end markets. On the commercial aero side, air travel demand remains strong. We're seeing solid air traffic growth with global revenue passenger miles essentially back to 2019 levels and domestic air travel well above 2019 levels. We also expect strong demand for holiday and business travel for the remainder of the year, supporting continued aftermarket strength for both wide-body and narrow-body aircraft. On the defense side, the elevated threat environment is continuing to drive increased defense spending globally. Just one example, in the quarter, the United States approved moving forward with the sale of F-35 aircraft to South Korea. That's estimated to be worth about $5 billion and will support further growth with this customer for F-35 content for years to come. Additionally, the U.S. State Department approved a significant sale to Spain for the Patriot air and missile defense systems earlier this month, and that's expected to include approximately $1 billion of Raytheon content. And as Russia's invasion of Ukraine unfortunately continues, we are seeing significant demand from the U.S. and our allies for advanced air defense systems and munitions. During this past quarter, this included additional orders for NASAMs, Excalibur, which are precision-guided artillery shells, Stinger, anti-aircraft munitions, and TOW, anti-tank guided missiles. Domestically, despite what we've seen over the last few weeks in DC, we remain confident that there is bipartisan support for increased defense spending, and RTX continues to be well positioned across all three of our businesses. Shifting to Pratt & Whitney, let me give you an update on the powder metal manufacturing quality matter. Our efforts to date have been heavily focused on ensuring the safety of our engines. As you saw in the press release this morning, we have finalized the charge recorded here in the quarter, which is in line with what we had previously disclosed. So just a few thoughts on the powdered metal issue. Through the early stages of removals and inspections of the PW1100 engine, which powers the A320neo aircraft, our outlook, both financially and operationally, remains consistent with our expectations. We've also made significant progress on the safety assessments for the other Pratt & Whitney-powered fleets. That includes the PW1500, which powers the A220, the PW1900, which powers the Embraer E2, and the V2500, which powers the Legacy A320. With the analyses substantially complete, we do not expect any significant incremental financial impact as a result of those fleet management plans. The focus of both Pratt Whitney and the entire RTX organization is on maintaining the trust of our customers and our partners, and we are relentlessly working to improve upon the plans we have in place today. As I've said to many of you over the last few months, we remain confident in the future of RTX because the demand for our products is robust, our end markets remain resilient across both commercial aerospace and defense, and our team is laser focused on driving performance excellence to meet our customer needs. Our backlog is now a record $190 billion, with a pipeline of both existing franchises and new technology development. As we always have, we continue to actively manage our portfolio. As you saw this morning, we reached an agreement to sell Raytheon's cyber services business in a cash sale for approximately $1.3 billion, which combined with the recently announced sale of Collins Actuation Business This will generate approximately $3 billion of gross proceeds in 2024. So with that, let's turn to slide two. As we also announced this morning, our board has approved a $10 billion accelerated share repurchase program, or ASR, which we will be initiating tomorrow. Simply put, we see a significant discount between the intrinsic value of RTX and our current stock price. The long-term outlook of the GTF remains strong and Pratt's franchises extend well beyond the GTF. The V2500 has about 6,000 engines still flying and is in the sweet spot of its aftermarket cycle. Pratt Canada continues to be the world's premier small engine manufacturer with an installed base of more than 60,000 engines. And the military business of Pratt is the sole provider of engines on fifth generation fighters. Collins has a great portfolio, with 70% of their product lines serving as number one or two in their segments, and strong margin expansion opportunities. And lastly, our newly combined Raytheon segment has an incredible number of well-established franchises, along with a growing portfolio of next-generation technologies. This includes LTAMS, which is the Next Generation Patriot Defense System, and the Hypersonic Attack Cruise Missile, or HACM. Given the fundamental strength of the company and growth opportunities ahead, our board recently approved an $11 billion authority to repurchase RTX shares. This includes $10 billion through an ASR program to help capture some of that value more immediately. The new authorization replaces the company's previous program, which was approved in December of 2022. This ASR, of course, is on top of the $2.6 billion we've already repurchased year-to-date. Altogether, this will increase our capital return commitment to shareholders to $36 to $37 billion through 2025 from the time of the merger. That's up from our previous range of $33 to $35 billion. As I said, this ASR program will commence almost immediately and will be funded through a combination of short- and long-term debt. And importantly, we'll begin the process of deleveraging in 2024, in part supported by the proceeds from the recently announced dispositions that I just mentioned. So despite near-term headwinds, the future of RTX remains bright, and we remain steadfast in our commitment to deliver long-term shareholder value. With that, let me hand it over to Chris to provide additional color on the Pratt matters and to cover the Q3 highlights.
spk07: Thank you, Greg, and good morning, everyone. I'm on slide three. As Greg said, the powder metal situation is our top priority. The bottom line is that our outlook for managing both the fleet impact and the financial impact remains intact since our last call, and our team continues to execute on our fleet management and recovery plans. Let me provide a few more details, and I'll start with the GTF. With respect to the PW1100, there is no change to the plan we outlined in our September call. The fleet management plan and financial estimates remain consistent with what we said six weeks ago. And our focus is on executing all elements of the fleet management plan, in particular industrial output and material flow, MRO output, and customer support. The first tranche of the engine removals has occurred, and several of these engines were eligible for a project visit work scope. And the turnaround times for these visits average roughly 35 days. While project visits will be a smaller portion of the overall shop visits, the turnaround time is encouraging, and our teams are continuing to identify further process improvements. And from a process perspective, additional bulletins will be released in the next few weeks that outline the life limits and repetitive inspection requirements that we detailed on our prior call. And just by way of background, it is common practice for a fleet management plan to be communicated through multiple service bulletins and airworthiness directives to address different engine models, compliance times, or components and sections of the engine. Now let me share some details on our other GTF programs. For the PW 1500 and the 1900, we will institute a fleet management plan that will largely fit inside the shop visit plans that are already in place for these fleets. We believe the financial impact won't be significant and is contemplated in our current contract estimates and the financial outlook for Pratt. As part of this plan, we will place a shorter life limit on certain early configuration parts and an inspection requirement at about 5,000 cycles for current configuration parts. There will be some incremental AOGs in the first half of 2024, but we believe these will be largely mitigated by the end of the year. Regulators and air framers are aligned with this recommendation. We expect the service bulletins implementing these actions will be released beginning in November, followed by airworthiness directives. Let me now turn to the V2500. And as a reminder, we've had a fleet management and inspection plan in place since 2021. We're going to augment this plan by accelerating certain inspections, but expect this too will have very little impact operationally or financially. It will result in a total of roughly 100 or less incremental removals stretched out over the next four years, the majority of these visits having a project visit work scope. Again, very manageable given the size of the V2500 fleet, the number of spare engines available, and engines in the market with available green time. All of this is contemplated in our current contract estimates and Pratt's financial outlook. This action will be communicated through a service bulletin to be released in the November timeframe. And lastly, turning to the F-135, the Joint Program Office is reviewing our fleet management plan recommendation, which we believe will have limited, if any, operational impact on the customer. We continue to evaluate the balance of the PARAT fleet containing powdered metal and expect any fleet management plan updates, if needed, to have limited impact. With our fleet management plans largely set, Let me turn to the operational initiatives we are focused on to support our customers, increasing capacity and reducing turn times in our MRO shops, and ramping up the production of new full-life powder metal parts. First, with respect to MRO, we're accelerating previously planned investments in the GTF network to increase capacity and bring more shops online to support our customers. Just last month, Pratt announced they're adding capacity at their Singapore Engine Center, which will be Pratt's third facility expansion this year. And earlier this month, MRO shops operated by China Airlines and Korea Air inducted their first GTF engines. By the end of the year, Iberia Maintenance will also be joining the GTF aftermarket network. Once complete, this network will have 16 sites globally, having brought online six partner shops this year, but plans for an additional three shops to come online by 2025, bringing the total to 19. This will enable the network to be able to conduct more than 2,000 annual shop visits in 2025 to support the global GTF fleet, a roughly five-fold increase from 2019. We're also leveraging our extensive knowledge and talent across RTX to drive process enhancements to help us improve turn times in our MRO shops compared to our baseline plan. This includes a cross-functional team focused on part availability, repair development and industrialization, and process improvements on the shop floor. Second, and as we said in September, our objective is to replace as many HPT and HPC disks as possible with full life disks when engines come in for a shop visit in order to maximize their time on wing when they leave the shop. As we've said before, we've previously made the necessary powdered metal production and forging capacity investments and now are increasing our machining and inspection capacity. Our baseline plan today forecasts Q2 2024 to get to run rate capacity for disk production We are working to accelerate this timeline, which will allow us to replace an even larger portion of the fleet with full life parts. So to wrap up on powdered metal, our fleet management plans on the most impacted fleets are largely complete. The financial impact has been reassessed and remains consistent with what we said on our September 11th call on the subject, and we are fully focused on executing these plans. I'll shift now to the third quarter highlights, which Neil will provide some additional color on in a few minutes. On an adjusted basis, organic sales grew 12%, our third consecutive quarter of double-digit growth, and segment operating profit grew 15%. Adjusted EPS was in line with our expectations at $1.25, and we had strong free cash flow of $2.8 billion in the quarter. Sales growth was again led by the continued commercial air traffic recovery, a strong commercial OE growth of 26%, and 25% commercial aftermarket growth, while defense sales were up 2% year over year. In the quarter, we captured $22 billion in new bookings and had a book-to-bill of 1.19 across RTX, bringing our backlog to a record $190 billion. Finally, Q3 was the first quarter we officially began operating in our realigned three business unit structure. We are continuing to develop initiatives to leverage our scale and breadth to better enable customer alignment and best-in-class cost structure. Respect to our 2023 outlook, with one quarter to go, we are raising both our reported and adjusted sales outlook for the year. On a reported basis, we expect sales to be approximately $68.5 billion, and on an adjusted basis, we expect sales to be approximately $74 billion, up about 10% organically versus the prior year. We're also tightening our EPS range and have incorporated a few cents of tax headwind from some recent IRS guidance around R&D capitalization, which Neil will discuss further. As a result, we now see adjusted EPS between 498 and 502 for the year. Additionally, we expect free cash flow for the year to improve by approximately 500 million, driven primarily by the IRS guidance I just mentioned, which is favorable from a cash perspective. We are therefore increasing our free cash flow outlook to approximately 4.8 billion. So with that, let me turn it over to Neil to take you through the additional details on the quarter.
spk03: Thanks, Chris. I'm on slide four. As you saw, we finalized our estimate for the PW1100 powder metal matter here in the third quarter and have recorded a $5.4 billion sales charge, our share of which resulted in a $2.9 billion operating profit impact. This is in line with what we communicated in September and resulted in reported sales of $13.5 billion in the third quarter. As Chris said, we had adjusted sales of $19 billion for the quarter up 12% organically versus the prior year. Growth was primarily driven by strong demand across our commercial OE and aftermarket businesses as OEMs continued to ramp production and airlines supported the busy summer travel season. We also saw positive growth in defense as we continued to execute on our growing backlog. On a GAAP basis, earnings per share from continuing operations was a loss of 68 cents and included a $1.53 charge from the Pratt matter, as well as 40 cents from acquisition accounting adjustments for structuring and other non-recurring and non-operational items. Adjusted earnings per share of $1.25 was up 3% year-over-year, with higher segment operating profit partially offset by lower pension income, a higher effective tax rate, and higher interest expense. As Chris alluded to, the IRS recently provided guidance on R&D capitalization with respect to customer funded R&D for certain cost plus contracts. This means a portion of our previously capitalized R&D costs for tax purposes will now be currently deductible. While this will result in a slightly higher effective tax rate going forward, it will reduce our cash tax payments. In the quarter, this resulted in about a two cent headwind to adjusted earnings per share For the full year, we expect this to be about $0.03 of headwind. Finally, as we had anticipated, we had strong free cash flow generation in the quarter of $2.8 billion, which included a benefit of approximately $500 million from the IRS's R&D capitalization guidance I just discussed. Now with that, let's turn to slide five to get into the Q3 segment results. So before I begin, just a reminder, we are now reporting as three business units, Collins, Pratt, and Raytheon. Starting with columns, adjusted sales were $6.7 billion in the quarter, up 17 percent on both an adjusted and organic basis, driven primarily by continued strength in commercial OE and aftermarket growth. By channel, commercial aftermarket sales were up 30 percent, driven by a 35 percent increase in both provisioning as well as parts and repair, while modifications and upgrades were up 9 percent in the quarter. Sequentially, commercial aftermarket sales were up 6%. Commercial OE sales were up 27% versus the prior year, driven by growth in both narrow-body and wide-body platforms. And military sales were down 1%, primarily due to the timing of deliveries. Adjusted operating profit of $1.04 billion was up $287 million, or 38%, from the prior year, with drop-through on higher commercial aftermarket and OE volume partially offset by higher production costs, unfavorable military mix, and higher SG&A expenses. For the full year, given the continued strength in commercial OE and aftermarket, we now expect column sales range to be up low to mid-teens and increase from the previous range of up low double digits to low teens. With respect to operating profit, we are maintaining adjusted operating profit in our prior range of up $825 to $875 million versus the prior year. Shifting to Pratt & Whitney on slide six, as it relates to the powder metal matter for the PW1100, in September, we communicated that we expected the gross financial impact to be in the range of $6 to $7 billion with an expected Q3 pre-tax operating profit impact of approximately $3 billion. As I just mentioned, in the third quarter, we recorded a $5.4 billion sales charge, resulting in a $2.9 billion pretax operating profit impact, representing our net program share in line with where we expected. Recall, I mentioned that certain elements of the gross $6 to $7 billion cost will be booked up front, and the remainder will be booked over the remaining life of the contracts. So, looking at Pratt's quarterly results on an adjusted basis, sales of $6.3 billion were up 18% and 17% on an organic basis with sales growth across all three channels. Commercial OE sales were up 25% in the quarter, driven by higher engine deliveries and favorable mix in the large commercial engine business. Commercial aftermarket sales were up 21% in the quarter, driven by both higher volume and content, as well as favorable mix in both the large commercial engine and Pratt & Whitney Canada businesses. And in the military business, sales were up 7% driven by higher F-135 development and sustainment volume. Adjusted operating profit of $413 million was up $95 million from the prior year, with drop-through on higher commercial aftermarket sales partially offset by higher commercial OE volume, higher production costs, unfavorable military mix, as well as higher R&D expenses. Looking ahead, due to higher commercial OE and military volume, we now expect Pratt's adjusted sales to be towards the higher end of our prior range or up mid-teens versus prior year. Given the higher military sales as well as better mix across OE and aftermarket, we're also increasing Pratt's adjusted operating profit from our prior range of up $200 to $275 million to a new range of up $350 to $400 million versus the prior year. Turning now to Raytheon on slide seven. Sales of $6.5 billion in the quarter were up 3% on an adjusted and organic basis, primarily driven by higher volume ABLE Power programs, including AIM9x and advanced technology classified programs. Adjusted operating profit of $570 million was down $124 million versus the prior year, driven primarily by higher volume on lower margin programs and lower net program efficiencies, including additional headwind on certain fixed price development programs. In addition, as expected, there was an unfavorable impact of about $20 million from a significant contract option exercised in the quarter. Raytheon had $7.4 billion of bookings in the quarter including $1.9 billion in classified awards, a $412 million award for the Next Generation Short Range Interceptor program, and a $383 million award for HAWC and Patriot sustainment. This resulted in a book-to-bill of 1.16 and backlog of $50 billion. Year-to-date, Raytheon has a book-to-bill of 1.17. For the full year, we continue to expect sales to be up low to mid-single digits. With respect to operating profit, while the supply chain continues to improve, as evidenced by the increase in material receipts we have seen the last three quarters, Raytheon continues to have productivity and mix challenges. These stem from a combination of the fixed price development programs we have previously discussed, as well as higher production costs. As a result, are reducing Raytheon's adjusted operating profit from the prior range of up $125 to $175 million to a new range of up $25 to up $75 million versus the prior year. Before I hand it back to Greg, just a couple of comments on the environment for 2024. Overall, we anticipate another year of solid growth in organic sales, segment operating profit, margin, and free cash flow. However, the level of free cash flow growth will be tempered by the step-up in cash impacts associated with the powder metal matter, as well as some headwind from cash taxes related to R&D. While commercial air travel demand has been incredibly strong from passengers and airlines, we see growth beginning to normalize as we head into 2024, with RPKs back at 2019 levels, and the year-over-year compares becoming more difficult. However, overall, we expect continued growth in OE and aftermarket, including the ongoing recovery of the widebody. On the defense side, we continue to expect strong international and domestic demand, which has already driven a 2023 year-to-date book to bill of 1.22 and a record defense backlog that will continue to convert to solid growth over the next several years. While inflation has begun to moderate, there are still pockets that remain persistently high within our manufacturing base. We expect this to continue into the next year. We'll continue working all the mitigation actions we've had in place the past two years, and we'll implement additional strategic initiatives to offset the pressure we expect to see in 2024. Finally, as you know, we have seen a lot of volatility in the financial markets and interest rates. We expect this to drive further pension headwind next year. It could be about 45 cents on a year-over-year basis, given current market conditions and the actions we are taking to preserve improved funded status of the pension plan. So obviously a lot of moving pieces here, but we are focused on driving execution and aggressive cost reduction and remain optimistic as we look ahead towards 2024 and 2025. With that, I'll hand it back to Greg to wrap things up.
spk10: Okay. Thanks, Neil. Let's just take a step back if we can for a minute. I know there's a lot of information we've given you today, but really I think there are three key takeaways from our discussion. First of all, I believe we have our arms around the operational and financial impacts of the powdered metal issue. Our focus at Pratt Whitney and across RTX is now executing on those plans that Chris laid out. Secondly, strong demand continues in our end markets. That's evidenced by the 12% organic revenue growth we saw this quarter and the $190 billion backlog we ended the quarter with. Finally, We see tremendous value in RTX today, and we're going to utilize our strong balance sheet to take advantage of this through a $10 billion ASR. With that, let me stop and open it up for questions.
spk05: In the interest of time and to allow for broader participation, you are asked to limit yourself to one question. To ask a question, you will need to press star 1-1 on your telephone. Our first question comes from the line of Peter Arment of Baird.
spk15: Yeah, thanks. Good morning, everyone. Hey, Greg, the last time you got on the update call in September, you talked about kind of the headwinds that you would see in Pratt & Whitney margins as you look out kind of to the mid-decade. Has there been any change to that, or you could just give us an update on how you think that progresses? Thanks.
spk10: No, I think Thanks, Peter. What we laid out, as you recall, back in September, we talked about the fact that some of the costs associated with the inspection interval will end up in contract accounting at Pratt. And that will depress margins on the aftermarket by about a point over time. Not significant, but it's all contemplated in the Pratt guidance as we think about 24-25. Great.
spk15: I'll leave it there. Thanks. Thanks, Peter. Thank you.
spk05: Our next question comes from the line of Noah Pompaneck of Goldman Sachs.
spk08: Hey, good morning, everyone.
spk04: Good morning, Noah.
spk08: Can you spend a little more time on defense margins? I mean, I heard the specifics you noted in the quarter, but just, you know, continues to move lower. Is there some bigger, broader thing happening at the at the end market level. And Neil, did you ever provide a new consolidated, once you consolidated the two segments, margin target that's in the 25s? And just, you know, as you spoke to 24 earlier in the call, can you just kind of update us on how you're expecting that defense margin to progress into the middle of the decade from here?
spk07: Hey, Noah, it's Chris. Maybe I'll start and then ask Neil to talk about the consolidated Raytheon. First, in terms of the end markets, demand remains very robust. I heard Neil talk about the 1.17 book to bill in the quarter, or excuse me, year to date, the 7.4 billion in bookings in the quarter, and the overall backlog of 50 billion. So really strong demand for the products. That said, we have had some headwinds. We've had some inflation hitting some fixed price programs. We've had a handful of challenging fixed price development contracts. that have been a bit of a drag. You know, that said, we have had some productivity gains in certain areas. As you might suspect, those mature higher volume programs, we have had some efficiency gains by leveraging, you know, supply chain with larger buys. And as we look forward, you know, the supplier volume is growing. Labor attrition rates are, you know, decreasing, frankly, stabilizing. So those are some very positive signs as kind of we look forward in the defense business. I don't say we just need to get through key milestones on those fixed price development contracts. We've talked about those on several calls now. And we've got some key milestones coming up over the next 12 months or so that we've got to hit and get these programs through those milestones and then ultimately sold off.
spk03: Thanks, Chris. Let me just pick up on that where you left off. We definitely did provide a consolidated view. You're looking at margins around the midpoint, a little bit north of 12% when you get into 2025. I think as we look at the backlog and the mix of what we see the sales shifting to between now and then, we talked about this year being sort of the low point of our mix, more domestically focused, that we see that increasing over the next couple of years to be bit heavier on the foreign side, not surprising given the demand signals that we're seeing. So those are going to be the key drivers that get us heading in that direction. What we do know is that we have a really large backlog, $50 billion on the defense side right now, and expect that to continue to grow. And we're focused on executing as we transition a number of programs, as Chris was alluding to, from early production to full-rate production, and those programs mature. So we know the formula for driving productivity is We have seen some challenges this year, and I think on the development programs, we'll see that happen over the next 12 months, but that's the story longer term.
spk08: Is the rate of expansion in 24 and 25 similar, Neil, or is it more weighted to 25?
spk03: It's going to be more weighted to 25. We've got, as you know, a growing backlog here, but that will play out in sales probably later next year and accelerating through 2025. Okay. Thank you.
spk05: Thank you. Our next question comes from the line of Miles Walton of Wolf Research. Thanks.
spk02: Good morning. Hey, Neil, maybe on the GTF, looking forward, you're about to endeavor on something that looks pretty challenging in terms of 45% of the GTS powered A320 fleet on the ground and managing all of the customers and their expectations when you're on execution. I'm wondering, could you just lay out sort of the biggest risks in your screen that you're looking at? Is it part availability? Is it discovery of what incremental work might happen when you open up these engines? Is it this MRO network coming online? There's just a lot balancing and maybe just a prioritization of the risk register would be helpful.
spk05: Yeah.
spk07: Miles is correct. Maybe I'll kick it off. The single, I think, biggest lever that we've got here, and you kind of alluded to it, is MRO output. I mean, obviously, it's a challenging time for the customers. There's going to be a fair amount of the aircraft on the ground. We've got to accelerate MRO output. And the key parts of those are capacity and material flow. On the capacity side, you heard about the expansions that we're doing both within the Pratt shops and across the network. In terms of material flow, you've heard us talk about this before. Our objective is to put in full-life HPT and HPC disks at these shop visits, and we've got to go continue to ramp those up. Again, that ramp up is well underway and progressing, and key process steps like the powder metal production, forging, and heat treat. Investments have already been made and that capacity is in place. And then for more downstream processes like sonic inspection and machining, we're accelerating capacity there to make sure that we can meet this demand. And so some of this performed by Pratt and our partners and some by third parties. But again, very, very focused on the inspection capacity and the machining capacity. But at the end of the day, MRO output is what's going to support our customers and ultimately take down the AOGs and therefore take down the penalties we're going to have to pay to our customers.
spk02: Just a quick follow-up. Is that 19 number in 2025 of MRO shops different than your target earlier this year? I think it's the same. And so maybe just what has changed in terms of MRO network expansion?
spk07: Yeah. Yeah. Fair enough. It is the same, but we've accelerated as best we can some of these investments. I mean, they were in our plan, but we've accelerated as much of that spend as we can. And again, it's bringing on the inspection capacity into the MRO shops. That's a key to unlocking sort of the MRO throughput that I talked about. And then just beyond that for a second, Miles, and you heard us talk earlier about the 35 or so day turnaround times on those project visits. And again, we know those aren't the preponderance of the visits we're going to get, but there's a lot of learnings that go on and a lot of learning curve that gets, you know, that gets, that gets, you know, tackled when we're doing these things. So it's how quickly, you know, can we tear down inspection limits, repairs, test cell time, literally every part through every gate and MRO, you know, taking time out and being more efficient and putting more resources in those areas.
spk05: Thanks, Chris. Thank you. Our next question comes from the line of Rob Stollert of Vertical Research.
spk09: Thanks so much. Good morning.
spk05: Good morning, Rob.
spk09: This might be a question for Chris. Following up on the powdered metal issue, When you spoke about this in September, you seemed pretty convinced that the issue would not be a problem on the A220, the E2, and the V2500. But it does sound like there is something going on there now, although you said it's not significant. So I was wondering if you could elaborate on how the inspections have progressed on those engines. Thank you.
spk07: Sure. Yeah, thanks for the question. So I think we've we had telegraphed on the last call as we were going through our analysis is that those fleets would be far more manageable in terms of the impact. And while we will have inspections and life limits on the 1500 and 1900, as we said, they will largely fall within the shop visit forecast we have today. The maintenance intervals on those, frankly, are shorter than on the 1100. And so that's why many of these life limits and inspections fit within those plans. On the V2500, again, we've continued down that inspection, accelerated inspection path that we've had in place for about two years now. We're about halfway through that, through that fleet. And as we continue to do those inspections and learn more and analyze the data from those inspections, we're able to pinpoint certain engines based on sort of their profile, parts they've got in them, thrust, you know, other characteristics that we've targeted for accelerated, you know, inspections. But again, I think that's very manageable. That's a total of about 100 or less shop visits stretched out over four years. And again, those are largely going to be project visit work scopes. And we've got a lot of experience on project visit work scopes on the V2500. Those are in a 40 to 45-day turnaround time. We've become very, very proficient at those. So, again, that's why we're calling those, you know, very manageable and will not have significant financial or operational impact. That's right. Thanks, Chris.
spk05: Thank you. Our next question comes from the line of Sheila Kayaglu of Jefferies.
spk01: Thanks. Good morning, guys. Maybe if you could just walk us through cash. $1.6 billion generated year-to-date, $4.8 billion for the year. How do you think about the biggest drivers on a segment basis as you head into the final quarter of 2023? And then just given stepped-up GTF payments next year, what are the puts and takes there? And then if you don't mind, I just have to ask on the $10 billion ASR, why announce it now and not you know, de-risk some of the MRO output risk on the GPS.
spk03: All right. Thanks, Sheila. Let me start with what we need to do on free cash flow. So, you know, we were pleased to see $2.8 billion of free cash flow for the quarter, clearly strong and in line with the trajectory we need to see for the full year. And as you look at the fourth quarter, there's really two major parts that are going to drive getting to the $4.8 billion. The first is clearly operating profit, and we feel comfortable with that given the ranges we just put out there. And we need to see about $2 billion, a little over $2 billion of working capital improvement in the fourth quarter. And I would break that down into about three buckets. About $500 million of inventory improvement. Again, I think given the demand signals we're seeing and the growth we'll see in sales in the fourth quarter, we see that as achievable and manageable. We are expecting some significant advances and achievement of milestones on the defense side. So when you think about net liabilities and advances on contractual long-term contracts, that's about $1.2 billion. So that's a big piece of the fourth quarter. And then the rest really is the timing of disbursements that I would call normal in the course of business here. So a lot to do. But we have good line of sight to those things as we look to closing out the year. I'm not going to get into specifics about next year or the year after, other than to say we do see free cash flow growth in 24. And we'll come back in January and provide more of a roadmap as to how you get there. And Greg, you want to talk about the ASR?
spk10: Yeah, sure. Sheila, the question around the ASR timing, I think it's a relevant question. And I would tell you we had a fulsome discussion with the board. about the timing of the ASR. And what convinced the management team and the board that it was the right time is our confidence in the powdered metal resolution. And having bound the financial impact of that, we saw this as an opportune time to double down on the stock. And again, if you think about it, we bought $2.6 billion back year to date. This is another $10 billion at what I believe to be a significant discount to intrinsic value. And, you know, this is the time to buy. And I think, you know, we're doubling down in terms of our confidence, confidence in the future of RTX, but also confidence that we really do have our arms around the powder metal issue.
spk01: Great.
spk05: Thank you. Thank you. Thanks, Sheila. Our next question comes from the line of Ronald Epstein of Bank of America. Hey, good morning, guys.
spk12: Morning, Ron. When you look back on this situation, right, I mean, my understanding is it first kind of creeped up, call it the 2015 timeframe. And here we are today. What are the lessons learned, you know, like on a go forward basis? Because, you know, plants are going concerned, there'll be new engines in the future. What are the big takeaways to not have this happen again?
spk07: Hey, Ron, this is Chris. Yes, the incident that led to all of this was in March of 2020, and it wasn't until after we went through sort of a rigorous records review and did all of the investigation and the metallurgical analysis did we actually come to realize this was an incredibly rare defect. We hadn't seen it before, and then we were able to go back and trace it to 2015. But Again, we didn't have the data in hand to make that determination until, again, much later into 2020. And if you just sort of step back and say, okay, once you figure that out, what would you guys do about it? Well, we made a number of systemic changes at Pratt's powder metal processing facility, both manufacturing process changes and inspection techniques. We've gone through a rigorous safety risk assessment, I think you've heard us describe before, which incorporated all of the learnings from all of our inspection data into our models, right across every one of our programs. And you've seen us kind of go through those one by one as we prioritize the most impacted fleets. But again, it gets right across every single engine program that we've got. And then, of course, we've responded by developing comprehensive fleet management plans that have a combination of the enhanced inspections that we've developed and the life limits on the parts. I would say maybe more broadly and unrelated to the powdered metal situation. We've continued to leverage outside resources and expertise. We've got a product safety review committee comprised of outside industry experts and veterans that come in, look at our key engineering processes, do site visits, interview senior management, and then below, trying to understand culture processes and what we can do better, and they make recommendations, and we implement those. And that's something we do on a regular basis. Again, unrelated to the powdered metal, but we're not afraid to go leverage outside resources to give us another perspective.
spk12: And, I mean, does that mean kind of going forward in just sort of the nuts and bolts of Pratt, it's just going to require some more investment in, I don't know, infrastructure, engineering, or whatever, to just kind of make sure everything's where it should be.
spk07: Well, we're going to continue to invest, Ron, in automation for sure, both in terms of manufacturing process and our quality system. I'll tell you, we're also making investments in machine learning so that we can look at all of this, the thousands and thousands of inspection records and data that we've got in-house to help us better identify anomalies, get out ahead of issues before they, you know, turn into something, unfortunately, that has an impact on the fleet and on our customers. So we're going to continue to invest in those areas. We've had those investment plans in place. We're going to continue to, you know, accelerate those. Again, all part of the modernization of our footprint and how we do things, you know, better, faster, leaner.
spk05: Got it.
spk07: Thank you.
spk05: Thank you. Our next question comes from the line of Seth Safeman of JP Morgan.
spk06: Thanks very much, and good morning. Maybe a kind of small bundle here of questions about cash. I mean, given what the consensus is next year, $5.2 billion, you're buying back $10 billion or you're accelerating stock repurchase. I mean, Is it pretty fair to assume that, you know, Street's not going to be disappointed in what you guys have to say in January regarding cash? And then when we move out to 2025 and we think just about the impact, the change in R&D and the change in the interest expense that you'll have from the share repo, how should we be thinking about the 2025 target versus, you know, what you told us last month?
spk03: Okay, Seth, thanks for the question. You know, we're not going to get ahead of 2024, but we do see free cash flow stepping up. We are comfortable with our $7.5 billion 2025 free cash flow target that we've talked about. And as you think about what is going to be higher interest and an increased benefit from the R&D impact, those will just about offset in 2025. And so that's why Today, I feel comfortable, you know, staying with the $7.5 billion target for 2025. You know, of course, there's a lot of time between now and then, but those are the two moving pieces we see today.
spk06: Great. Thanks very much. You're welcome.
spk05: Thank you. Our next question comes from the line of Christine Lewog of Morgan Stanley.
spk13: Hey, good morning, guys.
spk10: All right, Christine.
spk13: So maybe I'm moving to a defense question. You know, the White House is requesting $106 billion in supplemental spending for a number of national security priorities, which includes over $50 billion in investment for the U.S. defense industrial base. Looking at this request, you've got equipment for Ukraine, air and missile defense for Israel, and replenishment of stocks piled for both. And this seems to fit quite nicely with the Raytheon defense portfolio. So how much of this opportunity is addressable to the company? And if the dollars are appropriated, when would be the earliest you could see this convert to revenue?
spk10: Christine, let me start on that. So as I think I mentioned earlier in the conversation, we've seen about $3 billion of orders so far related to Ukraine replenishment. And that's really replenishing U.S. war stocks. We expect another $4 billion of orders in the next two years. And most of that will play out over the next 24 to 36 months in terms of delivery. So you won't see a big revenue pop even next year from this. As we think about this next tranche, the President's $100-plus billion request, which is more than $40 billion for Ukraine, what you're going to see is the same things that we have been seeing but in much higher quantities. So obviously, NASAM systems, which is the short-range air defense system, and the AMRAAM munitions that we're using there, we're going to see those orders pick up, we would think, significantly. The same is true with the Patriot air defense system. Again, those are GemT missiles that we supply for that. Those are in short supply today. So again, a big ramp there. But you're also going to see other weapon systems come into play specifically around countering the unmanned air vehicles. And we have systems today like the Coyote, which is very effective in terms of short range dealing with these unmanned air vehicles. So again, I think really across the entire Raytheon portfolio, you're going to see a benefit of this restocking on top of what we think is going to be an increase in the DOD top line. again, as we continue to replenish war stocks and also replenish some of the fleet in the Pacific. So that's SM-2s, SM-3s, and other munitions that are really a huge part of this backlog that we've got today.
spk13: Thanks, Greg. And how do we think about the margin profile of these incremental opportunities? Are these new contracts margin accretive?
spk10: I would... No, actually... I wouldn't say they're margin accretive, nor would I say they're detrimental to margins. You know, these are going out at kind of normal cost type programs, right? So you're talking about margins, you know, 10, 11, 12%. Again, these are well known in terms of the cost of these systems. We've been producing them for years. So we know what the costs are. And again, I think, you know, again, it's helpful to overall margins, but it's not hugely accretive. Again, I think, Neil, 10 to 12 is kind of,
spk03: I think that's exactly right. These are mature programs that we've got a lot of history on. It's all about getting the supply chain ramped up to deal with the increased production that we expect.
spk13: Great. Thank you.
spk05: Thank you. Our next question comes from the line of Matt Akers of Wells Fargo. Yeah, you guys good morning.
spk16: Thanks for the question. I guess maybe just to clarify the section 174. The 500Million dollar benefit is part of that recovery from the 2022 payment. And I guess, how should we think about that sort of carrying forward that benefit into 2024?
spk03: Thanks. That's a good question. Yes, some of that is, in fact, the recovery of the 2022 overpayments, if you will. We were able to file our tax return on a basis that assumed deductibility of these cost plus R&D contracts. What will happen, though, is it'll be a little bit of a headwind next year because we'll get a little bit more cash back this year in the form of making lower estimated tax payments. And then next year, we'll start to bake that into our next year's estimated tax payments and filing. So that's how that'll play out. If you kind of look at it over a multi-year period of time, it's about 40% of what we previously were deferring and amortizing. So if you kind of stretch that through 2026, that's about $1.7 billion of incremental goodness in free cash flow over that period.
spk05: Okay, thank you. Thank you. Our next question comes from the line of Doug Harnett of Bernstein and Company.
spk11: Good morning. Thank you. Good morning. Chris, when you talked about the – on the GTF, on the project visits, I mean, 35 days sounds like a very short number. When you look forward, before you would talk about removal to a return – time of 250 to 300 days, kind of a peak level of AOGs in H1 of 600 to 650. Now that you're looking at this process in more detail, can you give us a sense of how any of that may have changed? And then also, if you're unable to do the replacements of disks and IBIRs and so forth in the short term, presumably that's an earlier revisit than you would have liked before. How does that affect your customers and the way you're thinking about the economics?
spk07: Yep. Good questions, Doug. So the reason I mentioned the early, very early sort of handful of project visits and how we've done on turnaround times is honestly just to show, you know, people that we are incredibly focused on taking minutes, hours, days out of this. And that can translate to the larger scope, you know, shop visits that we're going to face. The organization's incredibly focused on literally every gate within that process, including taking, you know, time out of the test cell process. But right now, Doug, those key assumptions that you just laid out, the wing-to-wing 250 to 300, the PKOGs, those are the assumptions. Those are what's baked into to the financial impact that we talked about here. And we're doing everything that we can to go improve upon those. And as I said earlier, MRO output to us is the linchpin on that. And so that's kind of where the organization's focus is, Doug. And that's where we've got to get better each and every day. To your point about the new full-life discs, yes, you know, our plan today is to put those in at OE first in the first quarter of the year and then starting in MRO in the second quarter of the year at each of these shop visits. To the extent that the ramp-up and the output isn't where it needs to be on those, we're not going to waste the induction slot, you know, Doug. The engines will come in. They'll get an inspection into your point. They'll have to then come back in at a 28 to 3800 you know, cycle re-inspect depending on the thrust of the engine, which is why it's so critical for us to continue this, you know, ramp up in powder metal forgings so that when the engines leave the shop for these visits, they have got the longest time on wing, you know, they can have. And we don't see these back in our MRO shops during this period because it'll add just more congestion.
spk11: And then if I may, one of the frustrations that I've heard out there is you've taken the original tranche, the first tranche off in September, but airlines seem to be somewhat in the dark on the next set of engines that need to come off wing and when that impact will be. What has taken so long in being able to help them know exactly what the impact and timing will be?
spk07: We're actually having those discussions, Doug. I've been part of many of them. Again, customer by customer, looking at their engines by serial number. Again, because you've got to look at the cycle times on those and bounce them off against the fleet management plan. So it's a rigorous, thorough process. But we're having those conversations with customers so they understand their specific impacts. As we said back on the September call, the lion's share of these, you know, incremental shop visits that we're going to have, the 600 to 700 and that 23 to 26, like two-thirds of those are 23 and relatively early in 24. That's what causes that bow wave, Doug, that peak of 650, you know, AOGs. And I think we talked earlier about when we're going to provide some of those service bulletins and the ADs. that are gonna follow on. So those communications are happening, but you're gonna see that impact early in 24. Very good, thank you.
spk05: Thank you. Our next question comes from Ken Herbert of RBC Capital Markets.
spk14: Yeah, hey, good morning. Hey, Chris, I wanted to follow up on that comment regarding your customer conversations. Can you provide any more sort of granularity on where you are in those conversations? And obviously, you've got sounds like incremental confidence in the ability to sort of bracket the risk around these with all the uncertainty, still the sort of timing on the shop visits. How are those conversations going? And just give us any sort of metrics around that.
spk07: know what what gives you that incremental confidence i guess on the customer side sure thanks for the question so the focus as you might imagine um over the last several months is is walking our customers through the safety risk analysis so that they understand that and what we're doing to ensure the continued safe operation of the fleet then understanding the fleet management plans at the cyclic limits the inspection intervals and its impact on their specific you know fleets we're going to have certain customers again, that are going to be more impacted than others just by virtue of their size, their reliance on the GTF. Again, it differs by customer. Conversations, as you might imagine, they're difficult. Customers understand what we're doing from a safety risk perspective and think we're doing the right thing, but they're certainly not happy with the net effect and they've not been happy with the fleet health even prior to powdered metal and our output on MRO and getting them the spare assets and the engines in our shops that they need. And so those are obviously difficult conversations, as you might imagine, Ken, and we're having them with each customer individually as we go through and tailor their support packages. Again, some are more impacted than others, but those conversations are ongoing and and they will continue into the early part of the year once people truly understand the fleet-by-fleet, customer-by-customer impact and the changes they're going to have to make to their flights, their network, and whatnot. So those conversations are happening, will progress early into next year.
spk05: Thank you. Thank you. That does conclude the Q&A portion of our call. I would now like to turn the call back to Greg Hayes for closing remarks.
spk10: Okay, thanks, Lateef, and thanks all for listening in today. As always, Jennifer and the IR team will be around to take your calls, and we look forward to seeing all of you in the coming weeks and months. Take care. Thank you.
spk05: This now concludes today's conference. You may now disconnect.
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